The Pound to Euro exchange rate tumbled by over a cent last week, sliding from a six-week low to a seven-week low as UK consumer growth showed signs of weakness.
Sterling’s 2016 Depreciation Starting to Bite
GBP/EUR weakened at the start of last week’s session on news that the British Retail Consortium’s (BRC) retail sales index contracted -0.2% in the three months to February, with non-food sales down for the first time in five years. The report adds weight to the argument that rising import costs, due to last year’s significant Sterling depreciation, are beginning to drive price rises in the UK and could dampen consumer spending trends in 2017.
The Pound stabilised in the middle of the week following Chancellor Philip Hammond’s Spring Budget, which featured a rise in the Office for Budget Responsibility’s (OBR) 2017 GDP forecasts from 1.4% to 2.0%. Traders were also cheered by news that government spending would increase mildly over the next year through additional social care and changes to business rates.
ECB Rate Hike Rumours Boost Euro
On Thursday the European Central Bank left monetary policy on hold, with the benchmark interest rate remaining at 0.00%, the deposit rate at -0.40% and the asset purchasing target at €80 billion. The Euro rallied following the statement due to rumours that some policymakers had discussed the possibility that interest rates could rise before the quantitative easing scheme was fully wound down. With Eurozone inflation currently running at a four-year high of 2.0% we could see the single currency attract buyers if the ECB shows more signs of hawkish intent.
Week Ahead
It’s hotting up to be a big week for GBP/EUR.
Scottish First Lady Nicola Sturgeon has already stated she plans to hold a second Scottish referendum between 2018 and 2019, which currency markets have reacted strangely serenely to, and newspapers reckon UK Prime Minister Theresa May could trigger Article 50 this week if the necessary amendments to the Brexit bill are resolved with haste.
We also have Dutch general elections, UK unemployment and March’s policy decision from the Bank of England.
Holland’s moderate parties are likely to form alliances to prevent the far-right anti-Islam nationalist Geert Wilders from attaining power. However, the nationalist movement is expected to gain more votes than at any election since WWII and this could weigh on the Euro.
UK unemployment is tipped to remain at an 11-year low of 4.8% but wage growth is predicted to slow from 2.6% to 2.5%, which could impact demand for the Pound. The BoE is unlikely to alter policy or use any hawkish rhetoric but Sterling will remain susceptible to any negative comments from Governor Mark Carney.